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Thanks to a weakening dollar, companies in the United States are selling more goods and services overseas.
But the biggest U.S. export right now isn't tractors or ball bearings or computer consulting or anything else American industry does. Our biggest export is inflation. And our No. 1 inflation customer is China.
Why should you care? Because the damage to China's economy could be enough to send it spinning out of control, with grim consequences for the rest of the global economy.
But first, the good news. In July, a weak U.S. dollar pushed American exports up to $138 billion, up 15% year over year. U.S. imports, meanwhile, grew to $197 billion, leaving the trade deficit at $59.2 billion, a small decline from June's deficit of $59.4 billion. The July decline was the fourth straight monthly drop in the trade deficit.
The absolute size of the trade deficit is less important than the size of the deficit relative to the U.S. economy, and here the news is even better. Thanks to continued growth in the U.S. economy, the relatively minor drop in the trade deficit has produced a big drop in the relative size of the deficit.
From a high of 7% of GDP (gross domestic product), a worryingly high level, the trade deficit has dropped to just 5% of GDP. Another string of months with higher exports and modestly declining imports could reduce the trade deficit to a relatively benign 4% of GDP.
A pain in the wallet
That's how a falling currency is supposed to work. A cheaper dollar encourages exports and discourages imports, leading to a gradual climb in the value of the dollar.Ultimately, a high U.S. trade deficit hits you and me right in the wallet. Here's how:
- When the U.S. is running a big trade deficit, our trading partners wind up holding a larger number of U.S. dollars every month. A trade deficit means we're importing more goods and services than we export, and we wind up exporting dollars in order to pay for the excess goods.
- As those dollars build up overseas, governments, companies and individuals recycle them by buying U.S. bonds and stocks and other assets.
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- This increases the exposure of these overseas owners of dollars to the risks of the U.S. currency and U.S. asset markets. If the value of the dollar declines, their dollar-denominated investments will lose value as well.
- At some point, these overseas owners of U.S. dollars start to demand higher returns -- higher interest rates on Treasury bonds, for example -- to offset that currency risk.
- Some may sell off a portion of their dollars, producing exactly the kind of fall in the currency that they had worried about in the first place, which leads again to a demand for higher returns.
- The higher interest rates demanded by overseas dollar holders finally start to slow economic growth in the U.S. That slowdown, plus the higher prices consumers have to pay for imported goods because of the weak dollar, takes a painful bite out of family incomes. (Or it halves or eliminates the family income, if one or both family breadwinners get laid off because of the slowdown.)
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Jubak’s Journal: Year of pork politicsChina has a new food-supply problem. Despite the existence of a Strategic Pork Reserve, notes MSN Money’s Jim Jubak, pork and poultry prices are soaring -- inflation is 49% -- and the resulting unrest is making Beijing nervous.
Though a weaker dollar might be great medicine to reduce the U.S. trade deficit, it confronts our trading partners with a rather stark choice: They can let their currencies rise relative to the U.S. dollar or intervene in the currency markets to keep the value of their own currency relatively stable against the dollar. Both choices hurt but in very different ways.
Continued: Bad news for our northern friends
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